Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Thanks for listening, and now onto today's show.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
Speaker: Coming up this week, we consider what's next for UK monetary policy following the Bank of England's latest rate rise.
Speaker: We find out how data releases can provide clues to the outlook for G10 currencies.
Speaker: And we take a look at what the latest PMI business surveys are telling us about the global economy.
Speaker: This podcast was recorded on Thursday, the 4th of August, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm P.S.
Speaker: Butler.
Speaker: And I'm Aline Van Dyne.
Speaker: We begin this week in the UK, where the Bank of England has increased rates by 50 basis points at its latest meeting.
Speaker: Liz Martins, senior UK economist, can tell us more.
Speaker: Liz, what was the reasoning behind a 50 basis point hike?
Speaker: Well, this is a step up in pace from the BOE.
Speaker: So far, it's been moving in increments of 25 basis points.
Speaker: But it told us in June, if necessary, we will act more forcefully.
Speaker: And this time around, it just can't get away from the fact that it does need to act more forcefully.
Speaker: It's now forecasting a peak in UK inflation of 13 percent year on year at the end of 2022.
Speaker: It's forecasting continued pressures in the labour market.
Speaker: And ultimately, it's concerned that those pressures become embedded globally.
Speaker: Now, it may be that the BOE doesn't want to do too much more, but the idea is if they do more now, that will help them not to have to raise rates too much more in the future.
Speaker: So we wouldn't use the word front loading because this is the sixth great rise in this cycle, but that's kind of the general idea.
Speaker: And Liz, anything in the general tone or the comments that were a bit of a surprise?
Speaker: Well, I think this is an exceptionally gloomy monetary policy report.
Speaker: I mean, the gloomiest that certainly I can remember.
Speaker: In a way, the BOE has been refreshingly honest.
Speaker: They're not offering us any kind of Goldilocks tradeoff here.
Speaker: They're forecasting a pretty long lasting recession with negative growth in both 2023 and 2024 and this very high inflation rate, which really lasts a long time.
Speaker: throughout 2023.
Speaker: So they're not telling us kind of everything's going to be all right anymore.
Speaker: You know, in a way, this is quite a grim economic picture for the next couple of years.
Speaker: And that goes to the seriousness of really the economic situation that we are now in.
Speaker: And Liz, what happens next, both on the rate side and the quantitative tightening side?
Speaker: So on the rate side, it's interesting because the BOE is actually raised rates by more than it has been doing.
Speaker: But it also is still saying we don't actually think we'll need to do that much more.
Speaker: And that message comes from the forecast.
Speaker: So if we look at the inflation forecast, for example, three years out,
Speaker: It thinks inflation would be closer to target if it left rates where they are than if it raised rates in line with market expectations.
Speaker: In other words, got to 3%.
Speaker: If it did that, there would be a massive undershoot, according to the BOE, of its inflation forecast.
Speaker: So on that basis, the BOE is telling us we don't want to do that much more or perhaps we want to do some more and then we think we'll end up cutting back.
Speaker: But in our view, they will do a little bit more.
Speaker: So we think there'll be another 50 basis points hike in September and then two more 25 basis point hikes.
Speaker: in November and December.
Speaker: Now you mentioned quantitative tightening and the BOE has in this meeting given the green light to the policy of active quantitative tightening, so active sales of the gilts in the BOE's portfolio.
Speaker: And it says it wants to provisionally it's minded to start these at the September meeting, so there'll be a vote in September.
Speaker: and then get started with the policy after that.
Speaker: And it's looking to do about £10 billion of active sales per quarter.
Speaker: So that's a little bit less perhaps than we were expecting.
Speaker: But also what we found interesting was the committee said bar to not pursuing that timetable is quite high.
Speaker: So market conditions would have to be quite stressed.
Speaker: for that policy not to be followed through.
Speaker: And that's interesting because actually the Bank of England's pioneering a bit here.
Speaker: We can't really think of an example of a global central bank that has ever sold down assets or bonds out of its sovereign bonds out of its portfolio.
Speaker: So this will be quite experimental and quite interesting to see what impact it has on yields and market conditions.
Speaker: Liz, thanks for talking us through a lot of directness and transparency from the Bank of England, it seems.
Speaker: Indeed.
Speaker: Thank you.
Speaker: We move now to the FX market, where interest rate expectations have been key to currency moves.
Speaker: But this week, Dominic Bunning, head of European FX Research, has been looking at recent economic data that reveal underlying divergences between major economies.
Speaker: He's here to explain why investors should take note.
Speaker: Don, welcome to the podcast.
Speaker: Hi, Piers.
Speaker: So, Don, we recently had both US and European second quarter GDP numbers with the US falling and the eurozone rising.
Speaker: Now, normally that would seem to apply a more positive view for the euro relative to the dollar, but you don't agree.
Speaker: Why not?
Speaker: Yeah, thanks Piers.
Speaker: I think the breakdown of the GDP numbers is really important here.
Speaker: So the headline numbers do suggest US weakness and European strength, but actually when you look at the components of some of that data, particularly the domestic consumption story, it's actually a lot more supportive of the dollar.
Speaker: And really what you've had in the US for some time is a very strong consumption story.
Speaker: And that strong domestic story should in our view, allow the Fed to kind of keep tightening
Speaker: to keep hiking rates through the course of the months ahead.
Speaker: If you look at Europe, yes, the headline data was quite strong and we don't have all of the breakdowns, but in terms of the last few quarters, the consumer recovery in Europe hasn't been anywhere near as robust.
Speaker: And so if you haven't got the same degree of domestic economic strength,
Speaker: then it's going to be much harder for the ECB to sort of keep delivering on rate hikes, certainly compared to what's priced in.
Speaker: So really what we're seeing and what we think is likely to happen is that it's going to be much harder for the ECB to deliver in terms of rate hikes, whereas I think the Fed can keep hiking rates through the months ahead.
Speaker: And then you get that divergence in terms of rate differentials, which we believe will contribute to euro dollar trading lower through the course of the year.
Speaker: And what are the risks to this GDP data being misinterpreted?
Speaker: Yeah, look, I think there's certainly a risk that if you just look at the headline numbers, you might think, look, the U.S. has had two quarters of negative growth.
Speaker: Some people would define that as a recession.
Speaker: And therefore, you think the Fed's going to have to pivot.
Speaker: This has been one of the big themes in the last few weeks.
Speaker: The Fed's dovish pivot.
Speaker: We don't think we're there yet at all.
Speaker: And I think really the Fed is so laser focused on getting inflation back down to target.
Speaker: And it's not that worried about the headline GDP numbers, because actually, as I say, the domestic story is still quite strong in the US.
Speaker: So I don't think that's going to really put the Fed off of their kind of tightening path.
Speaker: So I do think it's possible that the FX market has misinterpreted some of the data and some of the central bank sort of moves in the last few weeks.
Speaker: and has started to look for a weaker dollar.
Speaker: We don't buy into that story at all.
Speaker: We think the dollar is likely to rebound again.
Speaker: We still see the dollar strengthening because actually the Fed is going to be committed to tightening still.
Speaker: And actually some other central banks around the world might find it harder to keep delivering on those rate hikes through the rest of the year.
Speaker: Now, talking about rate hikes, we just heard from Liz Martins on the Bank of England's decision to increase interest rates by 50 basis points.
Speaker: How does that affect your view on sterling?
Speaker: Well, again, it's maybe slightly counterintuitive.
Speaker: We've been of the opinion that a 50 basis point hike wasn't really going to be particularly positive for Sterling.
Speaker: And that was really because the messaging around this hike was always likely to be actually quite dovish in some respects.
Speaker: So we've really had that come out of the Bank of England's forecast today and their press conference.
Speaker: You know, the bank is now looking for really quite weak growth numbers through the next year or so, even though it's got much higher inflation forecast than it used to.
Speaker: So it's a really, really nasty mix that the Bank of England is forecasting.
Speaker: And effectively, they are hiking into a recession.
Speaker: And that I don't think is a positive environment for Sterling.
Speaker: So we were warning about this risk going into the meeting.
Speaker: We thought that even if they delivered 50 basis points of hikes, it would probably not come with a particularly hawkish message and that Sterling could sell off on the back of that.
Speaker: And we think that's a theme that will probably persist through the back end of this year.
Speaker: It's going to be very hard for the Bank of England
Speaker: to deliver the degree of rate hikes that are priced into the market.
Speaker: And that likely disappointment from a rate hike perspective will also feed into sterling weakness.
Speaker: So we do still see sterling falling again through the rest of the year.
Speaker: Dominic, thank you very much indeed.
Speaker: Thanks very much.
Speaker: We'll be back in a moment to review the latest PMI data.
Speaker: I'm Fred Neumann.
Speaker: And I'm Harold van der Linde.
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Speaker: We end this week with a look at the latest PMI business surveys.
Speaker: James Pomeroy, global economist, has been assessing the numbers and what they tell us about the state of the world economy.
Speaker: He joins us now.
Speaker: So James, what are the latest headline data showing?
Speaker: So the latest set of PMI data for July is showing more signs of a global slowdown, in particular in the manufacturing sector where this has been going on for quite some time.
Speaker: These manufacturing PMIs grinding slower and lower over the course of the last few months.
Speaker: We're now at 51.1, so that is still a growth, but it's a much slower pace of growth than we saw both at the beginning of the year and in 2021.
Speaker: Service sector globally has been much more volatile in recent months.
Speaker: We saw a pickup in June, mostly because of some of the data out of China, but a pullback in July.
Speaker: That drop in the services PMI in July largely due to the US, but there's a big discrepancy in the US S&P global PMI and the ISM survey.
Speaker: So really the service data holding up maybe a little better than the manufacturing data in aggregate.
Speaker: Are you seeing any regional differences?
Speaker: We are to an extent.
Speaker: Most of the weakness coming through in Europe.
Speaker: So really quite clear in the manufacturing side of the economy with a big sea of red in those European PMIs in July.
Speaker: Now, that's unsurprising given the challenges.
Speaker: in terms of energy in the region.
Speaker: But we are also seeing a bit of a discrepancy between DM and EM more broadly.
Speaker: The likes of India and Brazil are posting some of the better PMIs in the world at the moment.
Speaker: And if you look on the sort of headline composite PMIs, the strongest readings in the world at the moment in Singapore, India, Brazil and mainland China, with Spain, South Africa,
Speaker: following in behind, whereas most of the weakness coming in the Eurozone, the US and Japan, where the PMI data suggests that growth is much, much slower.
Speaker: And could pricing pressures be beginning to ease?
Speaker: Yes, this is clearly one of the biggest stories coming out of the PMI data at the moment, that we're starting to see some of these extreme price pressures
Speaker: come back some way.
Speaker: Now, some of that is happening quite clearly in the price data.
Speaker: So on the manufacturing side, the input price indices and the output price indices look like they peaked around the turn of the year and have been steadily coming lower throughout the course of 2022.
Speaker: And we've seen a bit of a turn in the service side too.
Speaker: But the better news sort of going forwards in terms of those pricing numbers is the supply chain pressures continue to ease.
Speaker: So we've seen this in some of the non-PMI data too.
Speaker: But within the PMI survey, some of the supply delivery times and the backlogs data are clearly getting quite a lot better, which is actually setting up quite nicely in terms of taking away some of those inflationary pressures that have been coming through in the global economy.
Speaker: Now, of course, it may take some time for this drop in input prices to feed into output prices and consumer price inflation.
Speaker: But nonetheless, the PMI data do suggest that underneath all of the challenges facing the world, something good is happening in supply chains and price pressures.
Speaker: James, thanks very much.
Speaker: Thanks very much.
Speaker: So that's it for today.
Speaker: Thank you to our guests, Liz Martins, Dominic Bunning and James Pomeroy.
Speaker: And thanks to all of you for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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